Monopolies affect the price of goods primarily by giving the single seller significant control over pricing, since there is no competition. This control allows monopolies to raise or lower prices at will, depending on their strategic goals and market conditions
. Key effects of monopolies on prices:
- Higher consumer prices: Monopolies typically charge prices above what would prevail in competitive markets, often significantly higher (e.g., 20-50% more), because consumers have no alternative suppliers
. This results in reduced consumer welfare and a deadweight loss to society
- Price flexibility: While monopolies can set prices higher, they also have the power to lower prices if it suits their objectives, such as deterring entry by potential competitors or increasing demand
- Reduced output and efficiency: Monopolies often produce less than competitive firms would, which helps sustain higher prices but leads to allocative inefficiency and economic inefficiency overall
- Potential for price discrimination: Some monopolies engage in charging different prices to different consumers based on willingness to pay, further influencing prices and consumer surplus
In summary, the most accurate characterization is that monopolies can raise and lower prices at will , but they generally result in higher prices for consumers due to the lack of competition and market inefficiencies
. The other statements-monopolies always cause higher or lower prices, or have no effect-are incorrect or incomplete.
